Monday, November 24, 2014

Maybe it was the election. Maybe it was the economy. Maybe it was even a sign that an organization that was left for dead is bouncing back.

Whatever the reason, the U.S. Postal Service revealed today it had a bang-up October, with domestic mail volume up nearly 7% over the same month last year, rather than the 2% decrease USPS was expecting.

The beleaguered agency had "controllable operating income" of $647 million in the first month of Fiscal Year 2015, more than double what it budgeted or what it earned last October. Controllable operating income excludes what is euphemistically referred to as prepaid retiree health benefits, which USPS has stopped paying, and accounting adjustments for the future cost of workers compensation cases.

Big growth areas
Major mail categories with significant revenue increases over October 2013 included "Permit Imprint Nonprofit Standard" (43%), Parcel Select (30%), "Permit Imprint Regular Standard" (14%), and "Permit Imprint First-Class (7%), according to an in-depth financial report also released today. Even the Periodicals class was up a bit.

Despite the higher volumes, work hours increased by less than 2% and total expenses by less than 3%.

It will take more than one strong month, however, to get one of the country's largest employers out of the financial woods. USPS is frequently on the verge of running out of cash, and it has no ability to borrow money, even for such mission-critical needs as replacing its decrepit, inefficient delivery vehicles.

Wednesday, November 19, 2014

A major financial services company provides a rare peek inside its direct-marketing strategy, with lessons aplenty for printers, marketers, and postal officials

With more than $300 million spent annually on direct-mail postage, Discover Financial Services is one of the U.S. Postal Service’s largest customers. And though Discover still spends most of its direct-marketing budget on mail, it is increasingly shifting those dollars to a variety of digital media.

A Discover executive recently provided a peak inside the company's marketing strategy, demonstrating how digital media have become more competitive with direct mail and yet how good old snail mail endures as a marketing channel despite its high cost.

“Last year, for the first time, more of our new accounts were acquired through digital channels than they were through the mail channel,” Harit Talwar, Discover’s chief marketing officer, told the Postal Regulatory Commission recently.Postage rates up; digital costs down
Though they “once were rather immature marketing outlets,” digital marketing channels “are now viable, fully effective, cost efficient channels that produce good results, he wrote. “Moreover, they are channels that tend to become less expensive over time. This is in contrast to mail which also produces good results but tends to become more expensive over time.”

“For the Postal Service to continue to play in this arena, it must maintain and improve the effectiveness of mail, push mail to work effectively with other channels, and deliver that effectiveness at appropriate price points,” Talwar wrote. He was explaining why the PRC should approve a proposed negotiated service agreement between USPS and Discover that would provide incentives for Discover to spend more on direct mail.

“It is critical to understand that for us, Standard Mail is not a monopoly product for it operates in a highly competitive market that includes a wide variety of targeted digital channels,” he wrote.

“Our digital channels are now viable, effective, cost-efficient channels with higher adoption rates that reach far more recipients at a much lower price than mail.”

“Discover has many choices, and their number and effectiveness grow every year,” Talwar added. For example, the ability to target people by interests and even location, along with new creative formats, have made web advertising far more effective than it was in the days of untargeted, undifferentiated banner ads.

Skipping the light Fandango
“New technologies are emerging that would allow an advertiser such as Discover to promote the 5% Cashback Bonus promotional earn category to a user who is making a dinner reservation in their Open Table® app, reading a restaurant review in their Yelp® app, or buying movie tickets from their Fandango® app.”

“More customers are signing up for a Discover card via our mobile app than initially expected.”

Contrary to popular opinion, however, email no longer competes with direct mail when it comes to attracting new customers because consumers have learned to ignore un-targeted email blasts. But email is still “a highly effective channel” for cross-selling existing customers, Talwar wrote.

“Among the targeted marketing channels, mail is about two-thirds of our marketing spend for promotion of the Discover card. Four years ago it was a bit more than 80%.” Nevertheless, Discover’s spending on postage has increased 27% during the three-year life of its current NSA – an indication of how rapidly the company’s total direct-marketing expenses have risen.

Answering the unanswered question
For the printing and mailing industries, Talwar left a key question unanswered: Why does Discover continue to spend so much money on direct mail – the vast majority of it for postage – when its cost per acquisition from digital channels is in general so much lower? But he did provide a few hints:

“To acquire new cardmembers, we partner with an outside source on a database of prospects. Based on credit bureau attributes and risk tolerance, we send pre-approved offers with segmented messaging and pricing, or we send invitations to apply.”

Some new-customer mailings go to all of Discover’s “analytic segments, while others go only to select segments. “Segmentation is based, among other things, on customers’ creditworthiness and response rates.”

“We market primarily to those whose credit quality is sufficient to qualify for a Discover card.”

Mail is used extensively with existing customers, with “targeted offers to encourage them to activate their card, to increase their use of the card, or to take advantage of balance transfers. Mail is also used to promote our card's features and benefits, to promote business with our partner merchants, and to ‘cross sell’ our other products and services.”

“Mail is used in tandem with the other channels to reinforce each other and send a coordinated set of messages, or a common message across our channels to our targeted recipients.”

It's clear that Discover derives huge value from direct mail's ability to hone in on precise targets. Only mail messages can be delivered solely to prospects having good credit scores and other characteristics that make them likely to get approved for a credit card and to be profitable customers. Mail's targetability enables Discover to send different offers to different people, with especially high-value prospects getting additional mailings.

Mail is also the only reliable way to reach existing customers with a cross-selling promotion. (Yeah, there’s email and mobile apps, but do you look at every email and download the apps from all of your banks and credit-card providers?)

Talwar’s comments indicate that Discover doesn’t fall victim to “the last-click fallacy” – the belief that a sale should be attributed solely to the last communication the customer received before signing up. The company realizes that direct mail, like event sponsorships and TV advertising, makes people more likely to click on its digital offers.

“Mail is a very strong, viable, and highly effective channel, which is not going away,” Talwar wrote. “It is just not the only game in town anymore, and it is going to have to compete with these other channels, as well as with the channels that will emerge in the future if it is to maintain its position and prosper.”

Friday, November 14, 2014

With Postmaster General Patrick Donahoe announcing his retirement today, the U.S. Postal Service's Board of Governors named USPS Chief Operating Officer Megan J. Brennan as his replacement.

When Donahoe ends his 39 years with the agency on Feb. 1, Brennan will become the first woman to hold the position of Postmaster General, 240 years after the Continental Congress appointed Benjamin Franklin to the job.

Megan J. Brennan

Donahoe started with USPS as a clerk and became PMG four years ago. He gave no reason for leaving what Dead Tree Edition has called "the worst CEO job in America".

Here is Brennan's biography as it appears on the Postal Service's web site:

Megan J. Brennan was named Chief Operating Officer and executive vice president in December 2010. Brennan leads the continuous improvement of the entire postal network operation as well as the allocations of people and resources. She reports to the Postmaster General.

Brennan has responsibility for the day-to-day activities of 491,000 career employees working in more than 31,000 facilities supported by a fleet of over 200,000 vehicles. She is responsible for Post Offices, delivery and retail operations, facilities and the mail processing network. Reporting to Brennan are the vice presidents of Delivery and Post Office Operations, Facilities, Network Operations, Retail Channel Operations and the seven vice presidents of Area Operations.

Previously she was vice president of Eastern Area Operations. As the senior postal official she oversaw an area that encompassed Pennsylvania, Ohio, West Virginia, Delaware, Kentucky, Central and South Jersey, Western New York and parts of Virginia and Indiana. Reporting to the deputy postmaster general and chief operating officer, she was responsible for postal operations, including processing and distribution, customer service and administrative operations.

A 27-year veteran of the Postal Service, Brennan served as vice president of Northeast Area Operations from May 2005 until being named vice president of Eastern Area Operations. Prior to that, she was manager of Operations Support for the Northeast Area. In this capacity, she was responsible for coordinating and integrating processing and distribution, transportation and delivery operations throughout the Northeast Area.

Brennan also held the headquarters position of manager of Field Support and Integration, where she worked directly for the Chief Operating Officer.

Brennan joined the Postal Service in 1986 as a letter carrier in Lancaster, Pennsylvania, and began her management career as a delivery and collection supervisor. She has in-depth experience in both line management and support positions, having worked at the district, area and headquarters levels. She served as district manager, Springfield, Massachusetts, and plant manager for the Lehigh Valley and Reading, Pennsylvania, processing and distribution facilities.

Brennan is a graduate of Immaculata College in Pennsylvania. She is a Sloan Fellow and holds a Master of Business Administration degree from the Massachusetts Institute of Technology.

Wednesday, November 12, 2014

Snark alert: I believe in both the laws of science and the laws of economics, which these days means I'm neither a Republican or a Democrat. So don’t try to read any political bias into the following article; it is intended to be equally offensive to liberals and to conservatives.

The Obama Administration has enabled U.S. paper companies to pocket an estimated $25 billion in black liquor tax credits the past six years, but here’s a clear sign the tap is about to run dry: The paper industry’s trade association this week hailed the recent Republican election victories as a sign of “Americans’ real appetite for change in Washington, D.C.”

“The bureaucracy that causes delay after delay and regulations that fail to balance benefits with costs have created an atmosphere of uncertainty in the business community, making it difficult to plan for future investment when the rules change faster than they can be implemented,” said Donna Harman, president and CEO of the American Forest & Paper Association. She specifically singled out environmental regulations.

To understand this turn of events, and why the paper industry is biting the Democratic hand that fed it so lavishly, it’s time for a quick civics lesson about the political parties’ competing approaches to climate change:

Democrats want to tackle climate change head on, promoting regulations to tamp down greenhouse gases and new programs to encourage clean energy sources. But those well-intentioned programs mostly end up getting hijacked to benefit favored companies in ways that do nothing to help the environment.

The quintessential GOP approach is to scoff at climate change or the need for carbon-reducing regulations and incentives. Conservatives declare disagreement with the diagnosis (humans are speeding up dangerous climate change) because they don’t like the proposed cure (big government programs). But that doesn’t stop savvy Republicans from investing in companies that will profit from the new Arctic shipping lanes being created by the melting of polar ice.

Some liquor to ease the pain
The Democrats’ approach started paying off for the paper companies about six years ago, when "the miracle of black liquor" in the form of round-heeled Internal Revenue Service rulings literally kept several companies afloat during a down paper market. The IRS gave the companies permission to abuse biofuel-incentive programs by collecting billions in eco-incentives for doing what they had already been doing for decades – burning black liquor, a pulp byproduct, as a fuel source.

Her protest adds to that of William Henck, a whistleblower IRS lawyer who says IRS employees examining the black liquor credits were told by high-level agency officials “to take a position that was contrary to the law and to published IRS guidance.”

Clearly a cover-up
“There was in my opinion clearly a cover-up of the decision to allow well connected taxpayers to avoid reporting the black liquor tax credits as taxable income,” he wrote. He sees evidence that the cover-up goes all the way to the IRS’s Chief Counsel, an Obama appointee. (In one of many ironies in this twisted saga, one of the largest beneficiaries of the credits, Georgia-Pacific, is owned by the Koch brothers, who are not exactly known for their friendliness to the Obama Administration.)

There is evidence that Democrats left the original black liquor tax credits in place to win a key pro-Obamacare vote from Republican Sen. Olympia Snowe of Maine, where the credits helped a large pulp mill remain in business. (Republican legislators may not like big government in general, but they sure like it when it means bringing some pork home to their constituents. And it’s hard to say which party is worse about creating corporate welfare programs for companies that make generous campaign contributions.)

The Obama Administration and Democratic Congressional leaders also finagled with the credits and threats of additional credits to help “pay” for Obamacare. (Another civics lesson: The concept of "paying" for stuff in the Alice-in-Wonderland world of Congress has little to do with covering its costs. Don't try this at home, unless you want to take an extended tour of a federal correctional facility.)

Closing time
Paper companies are just about done squeezing the last drops from the black liquor credits. For example, Domtar said that the $222 million in earnings it booked last month because of favorable (and questionable) IRS rulings on the taxability of the credits is the last it will see of the government’s black liquor largess.

With no more black-liquor credits or other handouts coming down the pipe, suddenly big government doesn’t look so good to the paper industry.

Said the AF&PA’s Harman: “In the coming months, I look forward to working with the new Congress to help create policies that make businesses a partner in meeting the needs of society through sustainable regulations that balance environmental, social, and economic considerations.”

Translation: “We could stomach the Democrats’ big-government policies as long as the hand-outs exceeded the cost of anti-business regulations. But now that the money has stopped flowing, we might as well throw in our lot with the party that is likely to roll back those regulations.”

Thursday, November 6, 2014

A lot of ink has been spilled discussing and cussing the U.S. Postal Service's plan to close 82 mail processing centers next year. But the three images below tell the story in a nutshell.

David Williams, USPS' vice president of networks, showed these slides in a recent presentation to mailers about the "Phase II" consolidations scheduled to begin in January.

The first slide demonstrates why: The volume of highly profitable single-piece First Class letters is barely half of what it was seven years ago.

The reduced volume is a major reason the Postal Service needs fewer sortation centers -- and the $750 million annual savings it estimates the consolidations will generate. ("AMP" refers to Area Mail Processing studies, USPS's process for evaluating the expected impact and savings from potential plant consolidations.)

The second slide demonstrates that the plants to be closed are spread throughout the country and are primarily Processing & Distribution Centers. Williams said the closings will be part of another "methodical, measured transition" and that, as usual, affected employees will be offered "options for staying with the Postal Service" rather than being laid off.

The third slide shows the end result: By next October, the Postal Service plans to have only 239 processing centers, down 64% since 2007.

Saturday, November 1, 2014

Postmaster General Patrick Donahoe made a statement this week demonstrating that postal executives’ views about weekend delivery of packages have changed significantly in the past four years.

"The future will be a seven-day package world and a five-day mail world," a USA Today article quoted Donahoe as saying.

In 2010, the U.S. Postal Service released its “action plan for the future” that called for elimination of Saturday delivery, with no exceptions. But, responding to concerns about delayed deliveries of prescriptions and other vital parcels, postal officials acquiesced and changed their plan to include Saturday delivery of packages.

No one – not even the most ardent advocates of postal service or even the postal unions – was talking about adding Sunday delivery of any kind.

But in recent months, weekend delivery of parcels has gone from obligation to opportunity. The Postal Service is delivering Amazon packages in a growing number of urban markets. In San Francisco, it is testing same-day, seven-days-a-week delivery for multiple retailers and today added early-morning grocery deliveries to its test offerings in that city.

Donahoe’s comment to the newspaper suggests that the long-term plan is for Sunday to become just another day of delivery as far as parcels are concerned.

Why the change of heart?
Why are postal executives who wanted to eliminate a day of parcel delivery barely four years ago now trying to add a day?

They are seeing huge potential in the e-commerce boom, which is fueling rapid growth in business-to-residence deliveries. And they are recognizing where the much-maligned USPS has competitive advantages over its private competitors.

United Parcel Service, for example, is seeing 60+% annual growth in UPS SurePost, its low-priced option that turns packages over to the Postal Service for final delivery. FedEx’s SmartPost similarly relies on the Postal Service to for “the last mile” delivery to residential customers. Neither company can deliver to residential customers as efficiently as USPS can.

In a move to cut out those middlemen and grab more of the e-commerce dollars, the Postal Service recently reduced Priority Mail parcel rates for big mailers by as much as 55%.

Changes in its workforce have also enabled USPS to reduce its delivery costs. The average hourly rate for the city-carrier force, for example, dropped 5% in the past year as the Postal Service increasingly relied on city carrier assistants (CCAs) and other non-career employees. The agency plans to have only CCAs delivering groceries in the San Francisco test.

What’s also changing is the Postal Service’s strategic focus. The same electronic media that are cutting into USPS’s traditional bread and butter – delivering letters – are also creating profitable growth opportunities in the package business. That’s why it wants to give short shrift to traditional mail while expanding service in the package realm.

Unlike letter delivery, USPS doesn’t have a monopoly in the parcel world. But its massive delivery network and unique ability to reach every address in the country every day of the week may give it a virtual monopoly in certain types of package delivery.

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